Betting on biotech

“It’s really a bunch of small pictures,” says Babs Carryer, founding partner and board member of LaunchCyte, an investor in early stage biotech ventures.

Nearly everyone in town agrees with that assessment, and that any one of the small pictures could break out as a panoramic success that would fuel the fortunes and sow the seeds of scores of others, either by creating spinoffs or by attracting attention of entrepreneurs to a region rich with resources for starting and growing life science ventures.

In that sense, biotech isn’t unlike information technology, where, in some instances hundreds of successful companies can trace their roots to a few big scores. Indeed, some in the local biotech scene believe there are several companies in Pittsburgh on the verge of breaking out.

“I think there are some blockbuster stories ready to erupt,” says Raymond Vennare, CEO of Immunosite Inc., a Pitt spinout.

Vennare says the big breakthrough will likely come out of a combination of efforts that includes life science research, data collection and statistics, all disciplines in which Pittsburgh institutions excel.

If one or more comes to fruition, they can have a powerful leveraging effect for the region‚s biotech industry. Such successes draw the attention of investors and scientists and put Pittsburgh in the spotlight, not to mention the synergy they create in the local biotech community.

“Once you have a couple of successes, they feed off of each other,” says Vincent Jannetty, CEO of Bonecraft Inc., a company that has developed a less invasive system for joint replacement that uses new surgical tools and computer software, and that promises fewer complications and faster patient recovery.

Those successes tend to draw people like Jannetty, who co-founded a successful spinal implant company in Austin, Texas, that raised $20 million in venture funding and was sold this year to Abbott Laboratories for $170 million. Jannetty says the opportunity with Bonecraft and the presence of the universities and health care system to support its efforts drew him to Pittsburgh.

Bringing people like Jannetty to the region, seasoned businesspeople with experience in building biotech companies, is critical. There aren’t that many businesspeople in Pittsburgh with deep experience in biotech ventures, says Carryer, and those who are here are stretched thin, serving on multiple boards and sought by entrepreneurs to invest in fledgling ventures.

The human capital that the universities and health system can offer means that companies in fast-growth stages won’t be stunted by a lack of technology talent.

“For us, as we grow, it’s really important to have access to top-notch scientists,” says Phil Yeske, president and CEO of Fluorous Technologies Inc., a company that offers solutions to companies conducting drug discovery and development areas.

Not all, including Yeske, agree that waiting for the holy grail of the big hit is the wise approach.

“I tend to lean toward the notion that we need more companies and not just that big anchor,” says Yeske. “I think that’s been a mistake in the past.”

Yeske says, “more swings of the bat” will offer better odds of developing more strong businesses.

The driving force

Pittsburgh, most in the industry conclude, is exceptionally well-positioned to participate in the current wave of biotech development, with clusters of key institutions and intellectual capital that could support a blockbuster company or a plethora of smaller enterprises.

“The key thing that drives biotechnology is universities,” says Chris Capelli, director of technology management at the University of Pittsburgh, and Pittsburgh has two world-class research institutions, Pitt and Carnegie Mellon University.

Pitt alone has more than 40 technologies currently available for licensing in the biotechnology area. And University of Pittsburgh Medical Center, a health care system with an international reputation for medical research, has hundreds of clinicians involved in research with potential for commercialization.

The investment factor

Finding capital is always a challenge for start-ups, but biotechs face their own set of obstacles in Pittsburgh. Early stage capital is in extremely short supply, even though organizations like Innovation Works and the Pittsburgh Life Sciences Greenhouse have tried to close the gap.

When it comes to early stage funding for biotech, “There’s a lot of money in Pittsburgh, but not that kind of money,” says Capelli.

Pittsburgh’s old money community, some say, has a hard time grasping biotech concepts and buying into them as investments. And the protracted development cycles can scare away venture capitalists who are used to much shorter investment horizons.

To locate early stage capital, many biotechs have had to look beyond the region for sources of early stage funding.

“A good portion of our money comes from out of town,” says Carryer.

“There’s no shortage of savvy people, great ideas, promising business opportunities,” says Steven Chang, CEO of Immunetrics. “Still, access to capital certainly isn’t as abundant as in Boston, New York City, San Diego or even Philadelphia.”

The last three years have been tough when it comes to raising money because of the sagging financial markets, Capelli says, but his opinion is that the investment picture isn’t all that different in Pittsburgh than it is anywhere else.

“It’s tough everywhere,” says Capelli.

Bootstrapping

While there may be a huge success in the offing, Vennare’s not waiting to make the next big headline. Rather, he says, Immunosite is focusing on profitability and leaving its options open, to remain independent, become an acquisition target or launch an IPO.

Immunosite has an advantage over many start-ups, says Vennare, in that it is already generating revenue. It’s looking at partnerships with research institutions, and licensing of technology it can development into new products, like biological tests and assays.

Biotech companies face enormous financial hurdles before they can succeed. Long development and testing cycles, approvals by the Food and Drug Administration or other government agencies and marketing expenses can burn through millions of dollars.

Despite the huge amounts of capital required by commercialize biotech companies, there’s an appetite on the part of some venture investors to bankroll them. Precision Therapeutics, a company that provides cancer management services to physicians, landed $15 million in venture funding this year in a round led by Adams Capital and joined by Birchmere Ventures and Draper Triangle Ventures, all local venture funds, and three out-of-town VCs. Precision Therapeutics raised $17.5 million in an earlier round in 2001.

But for all of those who are bullish on biotech, others warn that it is folly to bet the house on a single branch of the technology tree.

Says Capelli: “Don‚t put it all on biotech.”

And while the ingredients exist to build a successful biotech industry in the region, getting all the players to work together — the university hierarchies, the technologists, business talent and the investment community — is a complex and often daunting task.

Says Vennare: “All the components are here. Getting them to work together is a different matter.”